Starting Out

For this tutorial, I will be using a hidden easter egg sword in my upcoming mod, Daedric Rune Blades. It's called "Somyun Gei".
This is the start of this tutorial, in NifScope.

Go into NifScope. Click "Load" on the top left. Find your mesh. Usually its (Your Oblivion Directory)/Bethesda Softworks/Oblivion/Data/Meshes. When you have it loaded, click on Render. Disable Havok, the Axes, and Nodes.

It should start to look like this:
Now that we have all the unneccesary junk off the screen, we have to angle it so that its in a good position for your icon. Mine will be like this:
Press Print Scrn on your key board. This will take a screenshot of your screen, as many modders/image sharers will know. Go into the GIMP. Paste. You will see the pricture of your item in the GIMP now, along with the horrid black/yellow background. (Depends of the version of Nifscope you have.)

In the GIMP

Click on the color picker.
Then click the background. Cut it out by right clicking (you probably know how though.) You can see that all the black in my sword disappeared with the background. You can either refill that when it happens, or just scale it. It will be small enough that no one will notice,
...and then select the image, and copy/cut (I'd copy in case you mess up.) Then, click Paste -> Paste As -> New Image
Now that we have our icon ready, we need to scale it for Oblivion's menu (will be different for most other games.) Now, Right click, Image, then Scale Image.
MAKE SURE IT IS AT 64x64! Toggle off the Scale Equality thing. (The chain looking thing.)

Then just save it to (Oblivion Directory)/Bethesda Softworks/Oblivion/Data/Textures/Menus/Icons and then wherever you want (you can make new folder etc.) That just about wraps it up, can't think of anything special to put in here... so... enjoy your new icons! (Also, make sure you save the file as .dds, otherwise GIMP will save it as an .xml, which is as far as I know a GIMP file. Not particularly useful for Oblivion. To save it as one just add .dds to your filename (ex. MyCustomIcon.dds)